Canadian Lawyer

10 www.canadianlawyermag.com COLUMN: BANKING ON CORPORATE UPFRONT Speaking litigation Corporate lawyers must overcome their reluctance to keep up with court decisions FOR A CORPORATE lawyer (at least, for one I know very well), keeping up with reported decisions relevant to corporate practice can be challenging. Among other things, corporate lawyers tend not to partic- ipate in many of them, and so the vocabulary in which they're expressed isn't always intui- tive. Speaking for myself, when I first read the words "judicial economy," I think of the mar- ket for purple sashes; when I see "preferable procedure," I think give me the gas; and even "duty of care" sounds more like a description of a tired and perhaps burdensome friend- ship than a critical element of tort law. Nevertheless, the corporate bar must per- severe when potentially important decisions such as the appeal in the LBP Holdings Ltd. v. Hycroft Mining Corporation case are released. The key issue in that case was whether a claim against the underwriters for negligent misrepresentation in relation to a public of- fering should be certified as a class proceed- ing. That issue was distilled to two questions: whether a class proceeding would be the pref- erable procedure, and whether the under- writers owed a duty of care to investors in the first place (such that the pleadings disclosed a cause of action). The underwriters had participated in a "bought deal" $150-million offering for Hy- croft. The prospectus for the offering (which included, as legally required, a certificate of the underwriters confirming that to the best of their knowledge the prospectus contained full, true and plain disclosure of all material facts) incorporated, by reference, disclosure materials filed by Hycroft. Those materials made statements about the company's gold mine production without any discussion of the mine's operational problems. When those problems were subsequently disclosed, the market price of the company's shares dropped 37 per cent in two days. The plaintiff shareholder sued, and Hycroft and two of its executives consented to certi- fication of the class. By the time action was taken to add the underwriters, the claim for damages under provincial securities legisla- tion was statute-barred, leaving the plaintiff with only common law claims (notably, stat- utory claims for misrepresentation do not require plaintiffs to prove reliance on the misrepresentation[s], a significant advantage not available for common law claims for neg- ligent misrepresentation). At trial, certification was denied, generally on the basis that (i) combining the various po- tential class members' claims would result in potential complexities and unmanageability because, although there were common issues, there would be many individual plaintiff issues concerning reliance, causation and damages, and (ii) given the average investment amount in the offering, individual litigation should be financially viable for unhappy shareholders. On the duty of care question, the trial court concluded that extending underwriters' po- tential liability for economic losses would, among other things, encourage inappropriate lawsuits, disturb the balance between com- mon law and statutory actions and inject the courts into relationships regulated by con- tract and statute. Specifically, the trial judge was not satisfied that the underwriters would have anticipated that investors were relying on them to act as "gatekeepers" in performing their due diligence or negotiating the terms of the offering and determined that the un- derwriters were in a different position from the company itself and from others, such as auditors and other experts, whose opinions are in the prospectus. On appeal, the Ontario Superior Court overturned the decision, ruling that a class action was the preferable procedure. That court looked past the complexities resulting from the combination of a statutory claim against the company and its executives with a common law claim against the underwrit- ers, focusing on the narrow issue of whether certification for the common law claim would be preferable. In so doing, the court acknowl- edged that the average investment in the Hy- croft offering was large but that there would still be significant barriers (not only financial but social and psychological) to individual litigations, and even if such individual liti- gations were to proceed, the result would be judicial diseconomy and risks of inconsistent results and duplication. As a practical matter, underwriters are cer- tainly mindful of potential liability exposure, but it is helpful to understand how court de- cisions are shaping that exposure — even if it requires understanding litigation-speak. I say this not wanting to admit what occurs to me when I hear the term "wanton misconduct," or even worse, "gross negligence." Neill May is a partner at Goodmans LLP in Toronto focusing on securities law. He can be reached at nmay@goodmans. ca. The opinions expressed in this article are his alone. ". . . the vocabulary in which [reported decisions are] expressed isn't always intuitive." 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